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News Alert
14 August, 2012
Tax paid by employer on behalf of employees qualifies as ‘non-monetary’ perquisite – exempt from tax
In brief
Facts
In a recent decision in the case of Sedco Forex International Drilling Inc and
others1, the Uttarakhand High Court (HC) held that income-tax paid by employer,
on behalf of the employee, qualifies as a ‘non-monetary perquisite’ as payment is
not made to the employee and such perquisite is exempt under section 10 (10CC)2
of the Income-tax Act, 1961 (the Act).

An agreement was entered between the employer and the employees providing
that the tax on salary of the employees will be paid by the employer.

Accordingly, in addition to the salary paid to the employees, the employer paid
tax on such salary.

The Revenue contended that tax paid by the employer was a monetary
payment. Therefore, tax is payable on this amount paid by employer.
1
DIT (IT) v. Sedco Forex International Drilling Inc and others [TS-603-HC-2012 (UTT)]
2
Section 10(10CC) of the Act reads as follows – “ in the case of an employee, being an individual
deriving income in the nature of a perquisite, not provided for by way of monetary payment, within the
meaning of clause (2) of section 17, the tax on such income actually paid by his employer, at the option
of the employer, on behalf of such employee, notwithstanding anything contained in section 200 of the
Companies Act, 1956 (1 of 1956)”
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

The employer (acting as agent of the non-resident employees) contended that
tax paid by the employer qualified as a perquisite within the meaning of
section 17(2)(iv) of the Act and that the same was not provided by way of
monetary payment to the employees. Therefore, it qualified for exemption
under section 10(10CC) of the Act.
Revenue’s contentions
The Commissioner of Income-tax (CIT (A)) passed an order in favour of the
department considering the tax paid by the employer as a monetary benefit in
hands of the employees and thereby denying the exemption claimed under
section 10(10CC) of the Act.
High Court Ruling
PwC News Alert
August 2012
The Revenue contended that tax paid by employer is a monetary payment and is
not covered under section 10(10CC) of the Act. Accordingly, tax is payable on the
tax paid by the employer.

Section 200 of the Companies Act, 1956 prohibits companies from paying
remuneration free of income-tax. However, tax-free remuneration is different
from payment of remuneration as well as tax payable thereon.

Section 10(10CC) of the Act has provided that despite the provisions of section
200 of Companies Act, 1956, an employee shall be entitled to exclude from his
total income, the tax paid by employer on perquisites, within the meaning of
section 17(2) of the Act, not provided by way of monetary payment to him.
Issue before the HC

The employer by entering into agreements with the employees had taken over
an obligation to pay income-tax payable by the employees.
Whether the tax paid by the employer on the salaries/remuneration of the
employees would constitute non-monetary benefits and, as such, the same would
be exempt under section 10 (10CC) of the Act?

Such tax paid by the employer will qualify as perquisite within the meaning of
sub-clause (iv) of section 17(2) as it is a sum paid in respect of an obligation
which, but for such payment, would have been payable by the employees.

Tax paid on account of the employees is certainly a monetary payment. The
same is not paid to the employee, but on his account to the income-tax
department.

Therefore, payment of tax on account of salaries of the employees, not by way
of monetary payment to the employees concerned, but, for or on, their account
would be a perquisite under section 17(2)(iv) of the Act, and such payment is to
be excluded from the income of the employees under section 10(10CC) of the
Act.

On appeal to the Income-tax Appellate Tribunal (Tribunal) by the employer,
the Tribunal, relying on the ruling of the Special Bench of Delhi Tribunal in
case of RBF Rig Corp3, decided in favour of the employer, considering the tax
paid by employer as non-monetary benefit and allowed the exemption claimed
under section 10(10CC) of the Act.
Assessee’s contentions
The assessee, relying on the favourable ruling of Special Bench of Delhi Tribunal in
the case of RBF Rig Corp contended that tax paid on behalf of employees is a nonmonetary perquisite in hands of the employees. Therefore, such perquisite will not
form part of total income of the employees on account of application of section
10(10CC) of the Act.
3
RBF Rig Corporation LIC v. ACIT [2007] 297 ITR 228 (Del)
2

The HC while answering the question in favour of the employer, refused to
interfere with judgement and orders of the Tribunal.
PwC News Alert
August 2012
Conclusion
Inspite of the ruling of Special Bench of Delhi Tribunal in the case of RBF Rig Corp
(above), the Revenue had continued to disallow the claim of exemption of tax on
tax paid by employer. With this judgement, there will be clarity on this position
and much needed relief to employers who have negotiated a net of tax salary
package for employees.
A consequence of this ruling will be that employees will not be liable to pay tax on
tax paid by the employer (refered to as ‘multiple grossing-up’) and thereby, leading
to savings in overall tax costs for the employer.
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